Advice needed about tax on pensions

NimilRice

I am a 65 year old UK citizen who has retired in Thailand. My only UK taxable income is from my government pension and forces pension which together add up to 7946 pounds which is below the current tax threshold level.

I have recently received notification of a short lived long forgotten pension policy which has a pot of around 8600 pounds. I would like to draw it as a complete lump sum and understand that the first 25% is tax free and the balance taxable. What I am not sure about is how, if at all, it will affect my current pensions and tax status as the income from the pot will take me above the tax threshold and if it means they now become taxable does that mean I have to pay tax for the whole tax year and then go through the rigmarole of trying to claim it back at a later date?

Any advice to point me in the right direction or to offer a better solution would be much appreciated.

Dazed_and_confused

It shouldn't affect your existing pensions at all.

They are both taxable but no tax is due as less than your Personal Allowance.

The £6,450 income from the new pension will also be taxable but you have £4,554 unused allowances which mean no tax payable on the first £4,554.

The remaining £1,896 will be taxable at 20% so you will owe £379.20 in tax.

If you take the whole lot in one go (equivalent to £77,400 annual pension as pension companies tend to operate a monthly payroll system) the pension company will have to deduct far more than that in tax but HMRC should refund the difference in due course. Or you can make a repayment claim and get it back quicker than waiting for HMRC, particularly if you take the pension income early in the 2019:20 tax year (you would probably be waiting over a year for HMRC as they wouldn't do anything until the tax year had ended). Form R43 might be relevant or maybe P53/P55.

One way to to pay the correct tax is to take the taxable element in smaller chunks, start with £1,042 or less, so HMRC can issue you with the correct tax code (your spare allowances) for future payments.

This all assumes you take the new pension in 2019:20, you haven't applied for Marriage Allowance and there is no double taxation treaty that enables any of your three sources of income to be treated as non taxable in the UK.

NimilRice

Many thanks for your quick reply Dazed and Confused. Please forgive me if my next questions seem to be something a child should know but I have been out of the tax system for around 25 years and find myself floundering at what should be a simple exercise.

You say that the pension company will deduct more than HMRC. Does that mean the pension company pays the tax at a high rate and passes on the remainder of the payout and I then have to claim any difference back from HMRC at a later date?

You mention forms R43 and P53/54. I don't know what they are and wonder if you could enlighten me a little so I know what I may have to ask for in the future.

I like the idea of taking smaller chunks. Is your figure of 1,024 pounds a sum that is added to the 25% tax free portion to bring me just up to the threshold of tax and what frequency in time are we talking about for receiving the remaining chunks?

You are obviously far more knowledgeable than I on these things and I truly appreciate your time and effort. After scouring the net for answers to my questions I only got part info with too many gaps to make decisions on my own personal situation so you have been a great help.

xylophone

One way to to pay the correct tax is to take the taxable element in smaller chunks, start with £1,042 or less, so HMRC can issue you with the correct tax code (your spare allowances) for future payments.

This may not be possible if this is an old policy where drawdown is not available - if so, a transfer to another arrangement with the same provider or a transfer to a new provider's scheme would be required and as you are a non-resident, you might find it difficult to find a provider.

The PA for next tax year (2019-20) is £12,500.

See here under "Getting the tax back"

https://adviser.royallondon.com/technical-central/pensions/benefit-options/emergency-tax-and-lump-sum-withdrawals/

Consider the effect on your taxable income of any inflation related pension increases in the new tax year.

Dazed_and_confused

You say that the pension company will deduct more than HMRC.

No. Because you might taking the annual equivalent of £77k the pension company might deduct more than you ultimately need to pay. HMRC do not deduct the tax.

Dazed_and_confused

Does that mean the pension company pays the tax at a high rate and passes on the remainder of the payout and I then have to claim any difference back from HMRC at a later date?

Yes. Because you are taking such a large amount all in one go then you will almost certainly pay more tax than is ultimately due. You don't have to claim it back, HMRC will normally repay excessive tax deductions when they review your details each year but if you take this pension early in 2019:20 tax year you would have quite a long wait if you did nothing (12 months +).

Dazed_and_confused

You mention forms R43 and P53/54. I don't know what they are and wonder if you could enlighten me a little so I know what I may have to ask for in the future.

They are forms. Google them (and look at gov.uk from the results).

Dazed_and_confused

I like the idea of taking smaller chunks. Is your figure of 1,024 pounds a sum that is added to the 25% tax free portion to bring me just up to the threshold of tax and what frequency in time are we talking about for receiving the remaining chunks

?

I didn't mention £1,024. It was £1,042. Which is the amount from which no tax will be deducted if the "emergency" tax code is used in the 2019:29 tax year.

Most pension companies referred to on here pay pensions monthly but you would need to check this with your own company.

Once the first payment is made HMRC will usually send the correct tax code to be used to the pension company. You might need to wait until month 12 of the tax year before you can take it all and pay the correct amount of tax i.e. nothing to claim back.

Dazed_and_confused

And as xylophone correctly points out you need to have a pension with the appropriate flexibility to do all of this.

NimilRice

Thanks very much for the assistance and info Dazed and Xylophone. I shall take a little time to inwardly digest all of this before I set forth on my mission, the path of which is becoming much clearer. :beer: